Funds bought gold in biggest rally since 2011

Bullion’s drop to a 34-month low in June is spurring demand from buyers of physical metal and jewelry. The cost of borrowing gold reached a 4 1/2-year high in London last week, and may be a “bullish signal,” Standard Chartered Plc said in a report July 10. The bank said gold may rally above $1,400 by the end of the year. A scarcity of liquidity in leasing can lead to high lease rates and negative forward rates, according to the London Bullion Market Association.

While Deutsche Bank AG said July 8 that the worst of the selloff may have passed, banks including Goldman Sachs Group Inc. and Credit Suisse Group are forecasting more declines. Money managers’ holdings of short contracts reached 80,147 last week, the highest since the CFTC data begins in 2006. That can also magnify any rally as speculators close out bearish bets by buying contracts.

Assets in exchange-traded products backed by bullion have plunged 25% this year, wiping $59.8 billion from the value of the funds.

Stronger Dollar

Gold entered a bear market in April as U.S. inflation failed to accelerate as much as some bullion buyers had anticipated and equity markets rallied. The prospect of higher interest rates and a stronger dollar mean the recent gains may be short-lived, said John Goldsmith, the deputy head of equities with Montrusco Bolton Investments in Toronto.

“Gold may have gotten oversold and was due for a bounce, but a bounce doesn’t a bull market make,” said Goldsmith, whose company manages C$5.50 billion ($5.28 billion) of assets. “There’s upward pressure on rates and on the dollar.”

Money managers withdrew $1.42 billion from gold funds in the week ended July 10, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.68 billion, according to EPFR.

Net-long positions in crude oil climbed 6.9% to 281,918 contracts, the highest since May 2011, the CFTC data show. Prices climbed for three weeks, the longest rally since May, and on July 11 reached a 15-month high. U.S. inventories fell 5.1% in two weeks, the biggest plunge since at least 1982, Energy Information Administration data show.